Treasury Management

Treasury management involves the process of

managing the cash, investments and other
financial assets of the business. The goal of
these activities is to optimize current and
medium-term liquidity and make solid
financial decisions involving invested and
investable assets. Treasury management also
includes hedging where needed to reduce
financial risk exposure.
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• Treasury management is defined as ‘the corporate
handling of all financial matters, the generation of
external and internal funds for business, the
management of currencies and cash flows and the
complex strategies.
• The demand for funds for expansions coupled with
high interest rates, foreign exchange volatility and
the growing volume of financial transactions have
necessitated efficient management of money. The
treasury management mainly deals with working
capital management and financial risk management.
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Tight money, escalating interest rates and

economic volatility have called for a
specialized skills called ‘treasury
management’. Until recently, no major efforts
were made to manage cash. In the wake of
the competitive business environment
resulting from the liberalization of the
economy, there is a pressure to manage cash.
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Financial risk management includes foreign exchange and

interest rate management, a part from managing equity and
commodity prices.
The key goal of treasury management is planning,
organizing and controlling cash assets to satisfy the financial
objectives of the organization. The goal may be to maximize
the return on the available cash, or minimize interest cost or
mobilize as much cash as possible for corporate ventures.
Dealing in foreign exchange, money and commodity
markets involves complex risks of fluctuating exchange
rates, interest rates and prices which can affect the
profitability of the organization.
 Objectives of the Treasury:
To take advantage of the attractive trading and arbitrage opportunities in the bond and forex
markets. b. To deploy and invest the deposit liabilities, internal genera­tion and cash flows
from maturing assets for maximum return on a current and forward basis consistent with
the bank’s risk policies/appetite.
2. To fund the balance sheet on current and forward basis as cheaply as possible taking into
account the marginal impact of these actions.
3. To effectively manage the forex assets and liabilities of the bank.
4. To manage and contain the treasury risks of the bank within the approved and prudential
norms of the bank and regulatory authorities.
5. To assess, advise and manage the financial risks associated with the non-treasury assets and
liabilities of the bank.
6. To adopt the best practices in dealing, clearing, settlement and risk management in treasury
operations.
7.To maintain statutory reserves – CRR and SLR – as mandated by the RBI on current and
forward planning basis.
8. To deploy profitably and without compromising liquidity the clearing surpluses of the bank.
9.To identify and borrow on the best terms from the market to meet the clearing deficits of the
Bank.
10. To offer comprehensive value-added treasury and related services to the bank’s customers.
11.To act as a profit center for the bank.
 Scope of Treasury Management

The scope of treasury management function is quite

vast and it continues to expand. A treasury manager
should be able to understand and appreciate the link
between business strategy, and organization.
Treasury management includes the management of
cash flows, banking, money-market and capital-
market transactions; the effective control of the risks
associated with those activities; and the pursuit of
optimum performance consistent with those risks.
This definition is intended to embrace an
organizations use of capital and project financings,
borrowing, investment, and hedging instruments and
techniques.
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1. Liquidity Management
2. Money Market Transaction
3. Capital Market Transaction
4. Correspondent Banking
5. Foreign Exchange Management
6. Rate Determination
1. Liquidity Management is related to maintain the adequate level of liquidity
and raise the profitability.
2. Money Market Transaction. The treasury department will purchase the
treasury bill within the approved limits
3. Capital Market Transaction. Treasury Department shall make the long term
investment in capital market.
4. Correspondent Banking. A correspondent banking is established through a
bilateral contract with foreign bank to co-operate in such banking services
as money transfer, foreign exchange and trade finance. Banks use
correspondent banking relationship to deliver services to customers on
markets where the bank has no physical presence.
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A correspondent bank provides services to a respondent bank. Both banks maintain

correspondent balances in each other’s interbank account. For instance, if you live in
USA and you ask your local bank to setup a Rupees A/C for you, they will most likely
open a “Nostro A/C” with a correspondent agent bank in Nepal that they have banking
relationship with for that specific purpose.
5. Foreign Exchange Management Popularly referred as FOREX . The conversion of one
country’s currency into that of another. It is the minimum number of units of one
countries currency required to purchase one unit of the other countries currency.
Different countries have different currencies with different values. When
international trade takes place payment is made in their currencies. For this purpose
the concept of foreign exchange came into operation. Treasury management covers
Foreign exchange in it. Treasury management also does Foreign exchange as per the
need and requirement of clients and financial institutions. All the trade that take place
in the foreign currency market involves the buying of one currency, this is because the
value of one currency is determined by comparing through another currency.
5.The determination of rate is the determination of exchange value between two
counties currency. Treasury management also determines the rate of one currency in
comparison to another country currency. Generally, the rate value of currency is
determined by the interaction between the demand and supply of currency.
 Role and Function of Treasury Management

The treasury department occupies a central role in the finances of the

modern corporation. The treasury department is responsible for
company’s liability. To meet the goal, a treasury department would need
to perform the following roles over time:
 1. Cash Forecasting. Dislike the accounting staffs who handle the cash
receipt and disbursement activities on daily basis, treasury staffs need to
draw all those accounting staffs records (within the organization including
its subsidiaries if any), and compile it to generate a cash forecast (short
and long-range).
2. Working Capital Management . The treasurer should be aware of working
capital levels and trends, and advise management on the impact of
proposed policy changes on working capital levels.
 3. Investment Management . The treasury staffs are responsible for the
proper investment of it. Three primary goals of the role are: (a) maximum
return on investment; (b) matching the maturity dates of investments with
a company’s projected cash needs; and most importantly is (c) not putting
funds at risk.
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4. Cash Managemnet • The treasury staff uses the information obtained from
cash forecast and working capital management activities to ensure sufficient
cash is available for opertional needs
 5. Treasury Risk Management • The treasury staffs are also responsible to
create risk management strategies and implement hedging tactics to mitigate
the whole company’s risk— particularly in anticipating (a) market’s interest
rates may rise and leave the company pays on its debt obligations; and (b)
company’s foreign exchange positions that could also be at risk if exchange
rates suddenly worsen.
6. Credit rating agency relations • The treasury staff shows the quick responds
to information requests from the credit agency’s review team.
7. Management Advice • Treasury staffs monitors the market conditions and
provide the necessary advice to the company.
 8. Bank Relations The treasurers meets with the representatives of bank that
the company uses, to: discuss the company’s financial condition, the bank ’ s
fee structure, any debt granted to the company by the bank, and foreign
exchange transactions, hedges, wire transfers, cash pooling, and so on.
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9. Fund Raising • It maintains excellent relation with the investment

community for fund raising purposes that is important—from the (a)
brokers and investment bankers who sell the company’s debt and equity
offerings; to the (b) the investors, pension funds, and other sources of
cash, who buy the company’s debt and equity.
 10. Credit Granting • The treasury department grants credit to the customer
to manage the cash.
 11. Principle of Security • Banks should invest the investable funds in safe or
secure areas in which default risk will be minimum.
 12. Principle of Liquidity • Maintain adequate level of liquidity to meet
borrower and depositor’s demand
 13. Principle of Profitability • Investment made by banks should provide the
maximum returns possible.
 14. Principle of Portfolio • Invest in the portfolio of various assets with the
objectives of the risk mitigation.
 
 Principles of Treasury Management
• What does it take to run a successful treasury department? Here are some basic principles
that can be used to enhance the impact treasury has inside and outside of the organization.     
1. Focus on the fundamentals 

No treasury function will be successful if it doesn’t know the basics. There are three
elements to consider.
Ensure day-to-day operations are run efficiently: The day-to-day operations are the
foundation of what treasury does and if it runs smoothly, then more time can be spent on
other strategic issues.
Manage risks effectively: Managing risk is about understanding what can go wrong and then
taking action. Treasury needs visibility into how current exposures impact the company
strategy, how a change in company strategy could change the exposures, and what can cause
financial distress (and the extent to which it can be managed).
Treasury must develop its people: With a strong, motivated team, more can be done and it
can be done better and quicker, meaning the treasurer will have more time to engage with
senior management and other stakeholders. Additionally, the treasurer will be better placed
to focus on and provide input into broader corporate strategic issues.
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2.Understand and support the business

The corporate’s business policies can consist of, for example, a focus on growth,
which new product to produce or markets to enter, selling and distribution,
organization and administration, etc. Treasury needs to understand these and the
impact it has on the cash flow and funding requirements, the risk associated with the
core business, etc., as it will be used to design relevant treasury and financial
strategies. 

3.Ensure the organization is funded at all times

One of the most important treasury activities is to ensure the corporate is funded at
all times—this ranges from day-to-day operations to ongoing working capital to
major acquisitions. Specifically, treasury needs to determine:
i. Efficient cash management and liquidity structures: Cash concentration, notional
pooling, etc.
ii. How much to fund: Cash flow forecasting, input from business units
iii. When to fund: Pre-fund if window of opportunity, bank funding gives flexibility
iv. How to fund: Which instrument (bank, capital market) or specialist (structured
finance, export credit agencies, securitization, hybrids).
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4. Build strong bank relationships

When managing bank relationships and broader bank strategy, the
following can be important drivers:
• Open and transparent relationships should be built. Treat banks fairly,
e.g., apply a merit based approach when giving business; give all the
banks the same information so that it is clear which ones really
understand the corporate’s strategy and come up with the best advice;
treat the banks well in the good times, as they will be needed in the bad
times; etc. 
• A periodic (e.g., annual) strategic review is important to provide
feedback to banks on their performance and to provide guidance to them
on the focus areas for treasury over the next 12 months, etc. This will
enable banks to focus on their key strengths and will assist in managing
their expectations as well.
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5. Expect the unexpected 

Situations differ but probably the best way to manage a crisis situation is by having skilled
people who have the ability to think on their feet and having good information and credibility
with senior management so that they will listen to treasury and then support its
recommendations. 

6. Ensure big transactions are well-executed

The probability of successfully managing big transactions will be enhanced by determining

what success looks like, identifying all the issues up front, determining who will do what, how
to escalate problems, engaging all the stakeholders early, and committing sufficient resources
for the duration of the transaction.

It is always sensible to capture the learnings of a completed transaction so that it can not only
be used to improve future transactions but also educate the wider treasury team. Choosing the
right counterparty to transact with is important, and never blindly trust external advice—
always test the assumptions and form your own view first. Additionally, a complex transaction
that is well executed under difficult market conditions can put the treasury team on the map—
treasury’s value to the organization will be elevated and it can help treasury staff when they
move to other senior finance or commercial positions in the organization.